is a Saturday evening. Nancy likes to attend the birthday party
of a friend in another town and expects to be back home Monday morning.
She keeps all the baggage in her car and begins her 200 miles long
journey. After some time, the car stops. Oops! There is no gasoline.
She still has to cover a 100 miles more, but can't drive any longer
unless she refuels the car. There is a gas station nearby. The problem
is that she doesn't have money. She has forgotten to take her traveler's
check or cash with her.
all get into such unexpected problems one time or the other. There
are many possibilities to get such problem resolved. One such is
to use Payday Loans. Although payday loans are handy, are they a
safe harbor in times of trouble This article addresses the question,
by looking into what payday loans are, how they work and contemporary
research findings that show how payday loans affect people.
are payday loans
loans are monetary assistance provided by lenders to the borrowers
for meeting unexpected and unavoidable expenses such as medical
emergencies or fixing a car etc.
do payday loans work
financially stressed person approaches a payday loan-advancing firm,
completes an application form and submits it. He also attaches documents
to prove his Personal Identity [such as driver's license] and Income
[employment, Social Security, disability payments etc]. Most lenders
expect the applicant to be in regular employment for at least 2
lender reviews the application and if it meets the abovementioned
minimum requirements, approves the application and lends the amount
to the applicant in cash, or transfers the amount to the applicant's
loans are typically two to four week loans that are repayable on
or before the ensuing payday. The borrower can either repay the
actual loan amount borrowed plus lender's fees before the stipulated
deadline or pay the borrowed amount, lender's fees and interest.
the lender lends the amount, the borrower hands in a postdated check
or a debit authorization letter to the lender, so that the money
lent plus interest, can be automatically transferred to the lender's
account, if the borrower doesn't repay the amount on before the
of payday loan:
the repayment is prompt, most lenders charge nearly $15 to $20 per
every $100 borrowed.
take a typical example. Someone borrows $300 from a lender for a
two week period.
On lender's instructions, she writes a personal check for $345 (including
the loan amount of $300 and the lender's fees of $45) in favor of
the lender and hands it over to him when she receives the loan.
If she is unable to repay the loan in two weeks' time, the lender
gets the amount transferred into his account, by using the personal
check given by her. If the borrower's bank deposit is less than
$345 at the time and the lender presents the post dated check to
the bank, the check may bounce. When this happens, the lender lets
the borrower face legal action, for the bounced check. If it is
difficult to raise $45 within the two weeks period to clear off
the loan, she gets it renewed for another term.
interest fee of $45 for a 2-week period equals $1,170 for a year,
which when converted into annual percentage rate (APR), would amount
to 390%. This is far higher than the APR announced on any other
loans including credit cards where the APR doesn't exceed 30% [though
they too have high default rate as in payday loans]. Thus, instead
of decreasing the borrower's financial burden, payday loans increase
are the borrowers
payday loans are easier to get and don't involve much of paperwork,
people view these as an easy means of solving their financial problems.
research on payday loans:
to a report "Quantifying the Economic Cost of Predatory Payday Lending",
based on a large scale survey and published December 18, 2003 [and
revised February 24, 2004] by The Center for Responsible Lending,
payday lenders force borrowers to keep renewing their loans by paying
high fees every two weeks just because they are not able to clear
the loan within this short period of time. The Center says, "This
cycle (the "debt trap") locks borrowers into revolving, high-priced
short-term credit instead of meeting the need for reasonably priced,
Consumer Federation of America, in a report entitled "Payday Lender
Shred Consumer Safety Net", published on October 3, 2002, says,
"Payday loan companies not only take a bite out of consumers' pocket
books with loans that cost 470% annual interest and are due in full
on payday". The report alerts Payday borrowers who have no bargaining
power against the "predatory" small loan market.
to payday loans:
are a few safe alternatives such as a payment plan with the same
lender, credit counseling, over draft protection, loan from a bank
or credit union, cash advances on credit cards or consumer loans
that the borrower can resort to, in times of need.
for your saving money:
is not difficult to keep away from stressful loans by following
simple strategies such as the following:
Calculate the total income and total expenditure in a month. Subtract
the total expenditure from the total income. The remaining amount
is the savings for the month. Keep monitoring your monthly savings
Deposit at least 10% of your net income into a savings account or
any other kind of investment such as bank Certificates of Deposit
or Series I or EE Savings Bonds. As these finance options carry
high annual percentage yield, their return is high. As these are
insured by the Federal Government, they carry little or no risk.
Do not spend more than what you earn. Savings can serve a 'rainy'
none of these is possible, Atlanta, like any other city in the US,
has several payday loan companies. It's up to you, to decide.
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